This is my latest book review in the Financial Times.
It is hard to separate any discussion of currencies from that of national economies and, ultimately, politics. A weak currency quickly raises awkward questions about the strength of the underlying economy and the political power of that state.
In the case of the dollar, the effect is particularly pronounced. Not only is it the US currency, but it is also world money. The dollar is widely used in monetary transactions globally, and it is often the currency in which foreign governments hold many of their assets. So any threat to the viability of the dollar can easily call into question American pre-eminence, and even the integrity of the global economy.
Over the past couple of years, the eurozone crisis has often pushed discussion of the dollar into the background. Financial markets have fretted not just about the euro’s volatility, but about the sustainability of the eurozone itself. Under such circumstances the fundamental structural weaknesses of the dollar are too easily forgotten.
The key challenge facing the dollar is how long it can maintain its role as world money with the US suffering a steady relative decline. The US is still the world’s single largest economy, but its influence is waning. According to the International Monetary Fund, the US share of world output fell from 24.7 per cent in 1980 to an estimated 19.7 per cent in 2010. Further falls are forecast.
Many of the much talked-about features of the contemporary world economy are essentially symptoms of this. The consistently yawning US trade deficit is the obvious example. It is difficult to see the US maintaining its leading position in the world economy when it is a net-debtor nation.
The flipside of the trade deficit is the huge accumulation of dollar reserves by other governments. While US fortunes are waning, those of some other countries – most notably China – are rising. The net-creditor nations are the ones that could, at least potentially, play a much bigger role in the world economy.
The US’s trump card is that no other power is even close to taking its place. The euro is struggling to maintain its integrity, let alone become world money. China’s renminbi, while growing in importance, still plays a minimal international role.
That is the central paradox at the heart of the world’s current economic problems.
Against this backdrop, the appearance of Greenback Planet by H.W. Brands, a professor of history at the University of Texas in Austin, is especially welcome. Prof Brands has provided a short, lucid, narrative history of the dollar from 1862 to the present. Such an account can give much-needed perspective on recent events while reminding readers that many developments are not as new as they seem.
In 1862, Abraham Lincoln signed a revision to the Legal Tender Act that broke the dollar’s link to gold and silver. It was one of the president’s first acts. The currency move, made at the peak of Britain’s global power, signalled the beginning of a process that would culminate in American global dominance.
Greenback Planet then moves through what is essentially a brief economic history of the US told through the prism of the dollar. Inevitably, it also touches on many key developments in world history. For those with little knowledge of the subject it provides a useful primer on the economic
significance of these events. Even those with some knowledge are likely to discover surprising facts.
While Greenback Planet has the strengths of narrative history, it also has its weaknesses. For those who want a chronological account, with the writer suppressing his own opinions, it is ideal. But those seeking a study that identifies and focuses on the key underlying forces at work are likely to be disappointed.
Ultimately, the rise of the dollar as world money was a reflection of the fact that the US became the dominant national economy. Without that country’s overwhelming productive power, it would have been just another currency. The relative decline of the US should shift the analysis towards looking at how well it negotiates the emergence of potential rivals.
It is hard to imagine the dollar maintaining its role as world money indefinitely, but there are probably several more chapters to be written before it relinquishes its privileged position.
Greenback Planet: How the Dollar Conquered the World and Threatened Civilization as We Know It (University of Texas Press, 2011; $25)
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